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HMRC Clarifies Impact of MOSS on Businesses Below U.K. VAT Threshold

The U.K.
tax authority, HM Revenue & Customs (HMRC), has clarified the impact on
small businesses of the new value-added tax (VAT) rules on the supply of digital
services to consumers within the European Union (EU). The new regime, which comes into effect across
the EU on January 1, 2015, makes VAT on such services chargeable in the member
state of the consumer rather than the state where the supplier is established.
Designed primarily to prevent internet giants from gaining an unfair
competitive advantage by basing themselves in EU jurisdictions with low VAT
rates, it will also have the effect of drawing many U.K. small businesses into
the VAT net for the first time.

Unpalatable Options

The
issue has arisen because of the high turnover threshold for compulsory VAT
registration in the U.K. At GBP 81,000, the threshold is much higher than in
most other EU member states - often by as much as GBP 20,000. As a result, many
U.K. small businesses do not have to register for VAT.

Under
the new rules, a business supplying digital services (e.g. e-books, PDF
downloads, software, music, games and pre-recorded online courses) to a
consumer in an EU member state must account for VAT in that state, under its
VAT regime. To ease the compliance burden on affected U.K. businesses, HMRC has
established, as permitted by the new EU regime, a VAT Mini One Stop Shop (MOSS)
– a service that enables U.K. businesses to account for VAT throughout the EU,
thereby dispensing with the need for them to register in all EU member states
where they do business.

A
pre-condition of registering for HMRC’s VAT MOSS service is registration for
VAT in the U.K. So to take advantage of MOSS, U.K. digital services suppliers
will have to register for VAT in the U.K. even if their turnover falls beneath
the U.K. VAT threshold. This appeared to leave small-scale U.K. suppliers of
digital services with three unpalatable options – retain the benefit of their U.K.
VAT exemption but suffer the burden of having to account for VAT separately in
each EU member state where they do business; avoid that burden by signing up
for VAT MOSS, but at the cost of losing the benefit of the GBP 81,000 threshold
in the U.K.; or not supply digital services to EU member states at all.

Shock and Worry

Not surprisingly, this has caused consternation among many small
businesses. “We’d planned to expand into
downloadable products from December”, the owner of a subscription stationery
business, Carla Watkins, told The
Telegraph, a U.K. national newspaper, on November 26. “I had planned to
launch an e-course in January. Though I’ve worked on it for months, it now
falls under these rules . . . We are now being held to the same corporate
compliance procedures as giants like Amazon. In one fell swoop, they’re
stifling innovation and cross border trade, and forcing people to close their
businesses – all for lack of consultation, clarity and communication.”

She was not a lone voice. “Although these changes
are an important part of the battle to make large companies pay their fair
share of tax, they are proving a shock for some small firms who are trying to
build exporting digital businesses”, the National Chairman of the Federation of
Small Businesses, John Allan, told The
Telegraph. “We are already hearing from members who are very worried and
want to know what to do about it.”

By December 7, an online petition, organised by a
group calling itself the “EU VAT Action Team”, and requesting the government to
“Uphold the VAT Exemption Threshold for businesses supplying digital products”,
had gained some 10,000 supporters. “Why should small digital businesses be
treated differently to other categories of small business in the U.K.?” asked
the petition. “This new legislation will cripple, and potentially force into
closure, thousands of micro-businesses across the U.K. – just as [the U.K.]
government claims to be trying to make things easier for small business in the U.K.”

New HMRC Guidance

Following a meeting with concerned parties in the
first week of December, HMRC responded to the furore by issuing additional
guidance on VAT MOSS on December 10. This makes it clear that businesses below
the U.K. VAT threshold will be able to use MOSS to account for VAT in other EU
member states without having to account for, and pay, VAT on sales to U.K.
customers. “Although it is a condition
of registering for the MOSS that you must have a U.K. VAT registration number
to identify the business,” the new guidance explains, “you will not lose your U.K.
VAT registration threshold."

MOSS users below the U.K. VAT threshold will still
be required to complete a U.K. VAT quarterly return, even if they not charging
VAT on U.K. sales, as well as declaring any supplies of digital services to EU
customers on a quarterly VAT MOSS return. Those not charging U.K. VAT will be
able to reclaim input VAT only on business expenses and purchases that are
wholly attributable to cross-border digital services supplies accounted for
through MOSS, or on the proportion attributable to those sales.

The guidance also reminds businesses of MOSS
record-keeping requirements. To establish that the correct VAT has been
charged, MOSS-registered businesses will be required to retain two pieces of
evidence of where each customer normally lives. Acknowledging that this
requirement “can sometimes present a challenge for small businesses”, the
guidance suggests the following two-step approach:

when the customer places
their order, they should be asked to confirm either the EU member state they
usually live in or their billing address; and

when the customer pays
for the product using the payment service provider, businesses should arrange
for the provider to supply them with the customer’s billing address and the
country code of his bank or registered credit card.

As the customer records will have to be kept
electronically, MOSS users will also need to register as data controllers with U.K.
Information Commissioner’s Office.

Ramping Up the Campaign

None of this has impressed the EU VAT Action Team.
“Unfortunately . . . this does not solve the issue for us at all”, the group
said in a statement issued after the release of the guidance. “There is still a
significant gap in understanding of our situation on the part of HMRC and no
meaningful progress has been made . . . [HMRC] have still singularly failed to
grasp that, far from not wanting to comply with the legislation, we simply
CANNOT, due to the requirements for the proof [of] place of supply.”

Promising “to ramp up the campaign to a new level”,
the EU VAT Action Team has now launched another online petition, this time
calling on the EU Commission “to unilaterally suspend the introduction of the
new EU VAT laws for micro businesses and sole-traders”. The new petition claims
that the “costs in paperwork, bureaucracy, and amendments to websites and payment
processing will simply mean that many businesses are no longer viable.”

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